Letters

Enron Affects All CPAs
What was the most significant event to affect the profession in the past 50 years? It was the disclosure of Enron’s massive manipulation of its financial reporting and the fall of one of the nation’s most prominent and respected CPA firms.

It has had a profound effect on me as a CPA, and is an event that affects every CPA, whether in public or private accounting, the academic or nonprofit world—even students deciding whether they want to join our profession.

Given the importance of the Enron debacle, why has the JofA, the profession’s leading publication, given it so little editorial attention? What limited attention the story has received reflected a legal tone, rather than the substantive analysis of a CPA.

What else can I say, other than that I am surprised, disappointed and a bit embarrassed.

Steven Edelman, CPA
New York City

When Foxes Guard the Hen House
I read “The Rise and Fall of Enron” (JofA, Apr.02, page 41). As reported in the national media, Arthur Andersen’s apparent “cooking of the books” was created by the firm’s unique policy decision related to final accounting interpretations.

That decision—to have local offices override accounting policy decisions made by Andersen’s corporate office in Chicago—is the smoking gun of the accounting profession. From what I have read, no other national accounting firm has this policy; no local office can override significant accounting policies that require “clarification.”

The former Enron auditor, who was on the policy committee and then relieved of those duties after the company complained, clearly understood that pressure from the Houston office overwhelmed the corporate office.

The lack of an Arthur Andersen independent accounting interpretation group that could override client-pressured local offices apparently led to the debacles at Enron and Global Crossing, both Arthur Andersen clients. In my opinion, these represent cases of “buying an opinion”—something that was taught as being unconscionable when I attended college.

When foxes guard the hen house, chickens get eaten. Please give more accurate, meaningful information in the JofA than what the rest of the media provide.

Dan Frank, CPA
Seal Beach, California

Profession Should Police Itself
I am amazed at the frenzy over how to prevent future Enrons. The solution is so simple—establish “real” auditor independence.

The SEC’s reporting requirements of a “change in auditor” should be eliminated. The commission should limit an audit firm to a one-year engagement only. Too often, the auditor and the client form a “common-law” marriage after a long engagement. In such a situation an auditor places the client (“spouse”) before the public, because tengo famiglia (an Italian expression meaning “the family comes first”). If the company was prohibited from engaging the auditor for five years, there could be no marriage and the public would come first. Most of all, auditors would know a subsequent auditor would review their work, thus creating the ultimate control. Every audit would be peer reviewed, and the public would not have to rely on bureaucrats at the SEC, with the effectiveness of the U.S. Postal Service, to protect them. The auditor would have an enormous incentive for excellence in performing audits, and the issues clouding the allegiance to the public would be eliminated.

Once the audits of public companies are addressed and no longer make headlines, we should address governmental audits. Taxpayers lose far more of their personal wealth each year than the Enron employees did, due to poorly performed audits that serve the government rather than the public. You will never see Congressional hearings seeking justice for taxpayers, so it is really up to our profession to make a difference.

Joseph Tomanelli, CPA
Mahwah, New Jersey

Revisiting Hedge Funds
“Freedom from Market Swings” (JofA, May02, page 49) was both enjoyable and thought provoking. While reflecting upon the article, I formulated two distinct impressions of the information presented.

First, it has been argued that recent valuations might not have been realistic or sustainable over the long run based, in part, on certain underlying financial characteristics.

Second, investors in every tax bracket effectively are forced to employ a buy-and-hold strategy through their employer-sponsored 401(k) plans. These plans generally do not allow the participants to “look beyond stocks and diversify with alternative investments.”

A lot of attention has been given to the 401(k) plans, but there is more work to be done as corporate America moves away from defined benefit programs toward defined contribution plans. Over time these programs will need to offer the flexibility of an unsheltered and individually managed account if they are to successfully fulfill society’s intentions and expectations. For example, investors require diversity not only within asset classes but also among investment alternatives if they are to reach Markowitz’s efficient frontiers. Alternatives create the need for sound advice and education, both of which benefit CPAs, the profession and markets by offering choice and transparency.

Samuel T. Broomer, CPA
Tolland, Connecticut